She portended that three rate rises were in the pipeline for next
year, more than had been expected.

Second, the market actually believed her. The sharp rise in bond
yields that has followed, with the US 10-year Treasury now yielding
more than 2.6 per cent for the first time in more than two years,
shows this.

So does the fed funds futures market, where investors place bets on
the future path of rates. On election eve, this market put the chance
of three rate rises next year at less than 5 per cent. By Wednesday,
before Ms Yellen spoke, this had risen to about 30. Now it stands just
above 45 per cent.

2 Answers
2

Using the following data from 12/18/16:
Jan 2017 Fed funds futures =9936,
Jan 2018 Fed Funds futures =9877
implies that 99.36-98.77 = 59bp of hikes are built in for 2017.
IF you assume the only two possibilities are 2 hikes or 3 hikes (meaning, 50bp or 75bp of hikes, assuming each hike would be 25bp), then by simple linear interpolation the probability of 3 hikes must be (59-50)/(75-50)= 36%

The above is a commonly used method when there are only two realistic possibilities, so the only data you need is the correct fed funds futures contract. If there are more possibilities, you need to utilize the options market in order to obtain more information. For example, if the Fed hikes 3 times the Fed fund futures will be at about 98.61. We look at the options market:

$\begingroup$@Sky yeah it seems it needs to be explicit in the answer then...$\endgroup$
– SRKX♦Dec 22 '16 at 5:50

$\begingroup$@dm63 Thank you! Very nice answer! Do you think the contracts one year a way are liquid enough to warrant a comment like "the market prices in 3 hikes"? I mean, of course we have the data so we might as well look at it but the significance could be low. Any comments on that would be very welcome!$\endgroup$
– vanguard2kJun 23 '17 at 9:41

It is not taken from options. The numbers are taken from the Fed Watch tool provided by the CME, who list the Fed Funds Futures. There entire methodology is available here - which details several examples.

If you "chain" successive months you will get the same answer. You can see this by selecting Dec 2018 with the tool and seeing the probability is currently 25.7% (it has fallen in recent days).